This UBA Employer Webinar Series
is brought to you by United Benefit Advisors
in conjunction with Jackson Lewis
For a copy of this presentation, please go to www.UBAbenefits.com. Go to
the Wisdom tab and scroll down to HR Webinar Series and click. Under
Employer Series click the Registration and Presentation link. Click the red
Presentation button to see the slides.
2
Represents management exclusively in every aspect of
employment, benefits, labor, and immigration law and related
litigation
Over 770 attorneys in 55 locations nationwide
Current caseload of over 5,000 litigations and approximately 300
class actions
Founding member of L&E Global
3
This presentation provides general information regarding its subject and explicitly may not be construed as
providing any individualized advice concerning particular circumstances. Persons needing advice concerning
particular circumstances must consult counsel concerning those circumstances. Indeed, health care reform
law is highly complicated and it supplements and amends an existing expansive and interconnected body of
statutory and case law and regulations (e.g., ERISA, IRC, PHS, COBRA, HIPAA, etc.). The solutions to any
given business’s health care reform compliance and design issues depend on too many varied factors to list,
including but not limited to, the size of the employer (which depends on complex business ownership and
employee counting rules), whether the employer has a fully-insured or self-funded group health plan, whether
its employees work full time or part time, the importance of group health coverage to the employer’s
recruitment and retention goals, whether the employer has a collectively-bargained workforce, whether the
employer has leased employees, the cost of the current group health coverage and extent to which
employees must pay that cost, where the employer/employees are located, whether the employer is a
religious organization, what the current plan covers and whether that coverage meets minimum requirements,
and many other factors.
IRS Circular 230 disclosure: Any tax advice contained in this communication (including any attachments or
enclosures) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties
under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any
transaction or matter addressed in this communication. (The foregoing disclaimer has been affixed pursuant
to U.S. Treasury regulations governing tax practitioners.)
4
Who is a Plan Fiduciary?
Fiduciary Duties and Standards Under ERISA
Fiduciary Damages and Penalties
Methods to Minimize Fiduciary Risk/Exposure
Claims Procedures Issues
Pertinent Prohibited Transactions
Emphasize the Welfare Plan Side/Health/Disability/Severance/Life
Insurance
5
Enacted in 1974 to protect the interests of participants in employee
benefit plans and their beneficiaries by establishing:
o Standards of conduct
o Responsibility
o Obligations for plan fiduciaries
Also provides remedies for violations
Covers such plans as healthcare, disability and death benefits,
pension and accident
Church and government plans are exempt from ERISA
6
Department of Labor Employee Benefit Security Administration
Pension Benefit Guaranty Corporation
Department of Health and Human Services (Health Care Reform,
HIPAA)
Internal Revenue Service
States’ Departments of Insurance
7
Many of the actions involved in operating a plan make the person or
entity performing them a fiduciary
Fiduciary status is based on the functions performed for the plan,
not just a person’s title
8
A person is a fiduciary with respect to a plan:
o “to the extent that he or she exercises any discretionary authority
or discretionary control respecting management of such plan or
management or disposition of its assets” or
o “has any discretionary authority in the administration of such
plan”
9
Appointing other plan fiduciaries
Delegating responsibility to or allocating duties among other plan
fiduciaries
Selecting and monitoring plan investment vehicles
Selecting and monitoring third-party service providers
Negotiating the compensation of third-party providers
Interpreting plan provisions
Exercising discretion in denying or approving benefit claims
10
Performance of purely ministerial duties, i.e., no discretion or control
The power to influence a fiduciary’s decision, e.g., mere advice by a
professional to a fiduciary. The advisor must have “actual decision
making powers”
Investment education (must not be investment advice for a fee)
An insurance carrier or TPA negotiating an agreement with the plan
sponsor is not a fiduciary act
11
The DOL: has set forth the following types of administrative
activities that it does NOT consider fiduciary functions. Beware that
the courts are not following this list in an expansive way.
o Application of rules determining eligibility for participation of
benefits
o Calculation of services and compensation credits for benefits
o Preparation of employee communications material
o Maintenance of participants’ service and employment records
12
o Preparation of reports required by government agencies
o Calculation of benefits
o Orientation of new participants and advising participants of their
rights and options under the plan
o Collection of contributions and application of contributions as
provided in the plan
o Preparation of reports concerning participants’ benefits
o Processing claims
o Making recommendations to others for decisions with respect to
plan administration
13
“A fiduciary shall discharge duties with respect to a plan solely in the
interest of the participants and beneficiaries and
o For the exclusive purpose of:
• Providing benefits to participants and their beneficiaries
• Defraying reasonable expenses of administering the plan
o With the care, skill, prudence, and diligence under the
circumstances then prevailing that a prudent man acting in a like
capacity and familiar with such matters would use in the conduct
of an enterprise of a like character and with like aims”
14
Diversify the plan’s investments unless it is clearly imprudent to do
so
Adherence to the Plan Document
o ERISA requires plan fiduciaries to act in accordance with the
plan document – as long as those provisions are consistent with
ERISA
o Is there a plan document?
15
Loss resulting from the fiduciary breach (plus court costs and
attorney’s fees)
20% civil penalty of amount payable pursuant to court order or
settlement agreement with (DOL)
$110 per day penalty for failure to provide requested documents
Prohibited transaction excise taxes (15% per year of amount
involved until corrected)
Criminal liability
Punitive damages are not allowed
16
ERISA provides that fiduciaries who breach their duties are
personally liable to restore any plan losses and to return any profits
improperly gained from the plan
A fiduciary also may be liable as a co-fiduciary, under ERISA, by:
o Participating knowingly in or knowingly undertaking to conceal
an act or omission of another fiduciary, knowing that the act or
omission is a breach
o Failing to comply with fiduciary requirements, enabling another
fiduciary to commit a breach of duty
o Knowing about another fiduciary’s breach and failing to take
steps to remedy that breach
17
Act Prudently
o Act solely in participant’s interests
o Be knowledgeable/educate yourself as needed
o Do not act or give advice outside expertise
o Do not give investment advice
18
Do you have a plan document/wrap plan?
o Is it signed and dated?
o Up to date?
o Do 5500s align with SPDs and plan document?
19
Periodically read the plan document and SPD
o Are they consistent?
o Do they reflect the intent?
o Does the SPD reflect how the plan is administered?
o Does the SPD include all the DOL required information?
Do not allow TPA or other vendor to use good faith or gross
negligence standard
Follow plan amendment procedures
20
Just do it right – what happens – get a letter/email/or oral request
Clearly document delegation and process/who does what?
ERISA claims procedures
o Time-frames must be met
o Documentation of claims and claims review
• Complete documentation
• Recognize subject to disclosure in court
o Review of denials – required ERISA language in response/meet
the ERISA requirements
21
Proper handling of claims and claims review procedures is critical in
the event of litigation
o Exhaustion of administrative remedies defense
o Record limited to claims and claims review record – you have
the opportunity to create the record
o Window into plan
22
Demonstrate fulfillment of fiduciary duties
o Procedural Prudence. Emphasis is the process of fiduciary
decisions, not the result
o Administrative Record. Document, document, document.
Everything should be documented, including detailed minutes of
all meetings and discussions, retain documents used at
meetings, the advice received from experts, deliberations on
advice and the action eventually taken
23
Hire Experts
o A fiduciary may rely on expert evaluations in making a prudent
decision, however, the fiduciary must undertake a review of the
expert’s work before relying on it to make a decision, i.e., a
fiduciary may not blindly rely on an expert’s advice
• The advice must be impartial, e.g., trustees were not allowed
to claim reliance on expert advice from a broker who
received commissions because the broker was not an
“impartial analyst”
• Part of procedural prudence
• Fiduciary must monitor delegatees
24
Establish clearly defined fiduciaries
Clearly allocate duties
Self-direction of investments by participant does not totally eliminate
fiduciary responsibility
25
Plan administrator
o Not the employer
o Committee
Plan investments may require different committee
Monitor fees and expenses/revenue sharing agreements/service
provider agreements
Hold and attend regularly scheduled meetings, at least semi-annual,
quarterly is better/less for welfare plans
26
Consider appointing fiduciaries/committee members by plan
document
Fiduciary insurance
o Do you have it?
o Does the directors and officers policy cover?
27
Investment selection and monitoring – fiduciary should:
o DOL regulations provide that a fiduciary satisfies ERISA’s
prudence rule if, with respect to an investment made, the
fiduciary gives “appropriate consideration” to those facts and
circumstances that the fiduciary knows or should know are
relevant to the particular investment
o Employ proper methods to investigate, evaluate and structure
the investment, including retention of professional advisors if the
fiduciary lacks expertise
28
o Solicit information from competing investment platforms
o Assemble and analyze data
o Compare competing programs on cost, performance and
references
o Exercise independent judgment. Avoid conflicts of interest
29
Remove key insiders from Benefits Committee. The Benefits
Committee should not include the CEO, CFO or legal counsel.
These individuals may attend meetings and participate in
discussions, but should not have a vote
Committee members must acknowledge their fiduciary status, in
writing
Prepare an Investment Policy Statement for retirement plans
30
Committee Charter?
o Welfare plans – probably not necessary
o Retirement plan – should have a charter
31
Separate settlor and fiduciary functions
o A settlor function is an action or decision made by the plan
sponsor/employer
o The most common settlor functions are design decisions, such
as, establishment of the plan, benefit formula and class of
employees eligible to participate in the plan
o Settlor functions are not an exercise of fiduciary discretion and,
therefore, not subject to ERISA fiduciary duties and standards
o A fiduciary making a settlor decision may turn a non-fiduciary
action into fiduciary action
32
Respond to document requests/30 days to respond
o 30 days to respond
o $110 per day/per violation penalty
o Attorney’s fees
o Leverage in litigation
Indemnification from Plan Sponsor?
33
The attorney-client privilege may not exist with respect to legal
advice given to Committee members
o Given unique relationship, courts have created an exception to
attorney-client privilege when a fiduciary receives certain legal
advice
o Courts have determined that exception exists because there is
no legitimate need for a fiduciary to shield his actions from those
whom he is obligated to serve
34
o Exception generally applies with respect to communications with
counsel that otherwise are privileged but relate to administration
of plan, e.g., benefits determinations
o Courts have held that fiduciary exception does not apply when
fiduciary performs a settlor function, i.e., plan amendment,
design or termination
35
Standard of review is derived from the plan’s language
The Supreme Court held that a “denial of benefits challenged under
[502](a)(1)(B) should be reviewed de novo unless the benefit plan
gives the administrator or fiduciary the discretionary authority to
determine the eligibility for benefits or to construe the terms of the
plan”
36
De novo standard: will apply where the plan language does not vest
discretionary authority in the plan administrator to determine benefit
claims
Arbitrary and capricious standard: will apply if the plan language
vests discretion in the plan administrator to determine such claims
37
The denial of benefits may only be overturned if it was “without
reason, unsupported by substantial evidence or erroneous as a
matter of law”
The court’s sole inquiry: whether the determination was based on a
“reasonable” interpretation of the plan. If reasonable, it must be
upheld
38
ERISA statute and DOL regulations set forth requirements for the
internal claims review process
Much ERISA litigation concerns allegations that the required internal
process was not followed
Therefore, it is important to understand the requirements, draft plans
that comply, and educate plan administrators to follow them
39
Notification of Initial Claim Denial Must Include:
Specific reason for denial
Reference to plan provisions on which denial is based
Description of additional material/information needed to perfect the
appeal and why needed
Description of plan’s review procedures, including right to bring civil
action after adverse determination on review
40
Appeal Procedures Must Provide:
At least 60 days to appeal (180 days for group health and disability
plans)
Opportunity for claimant to submit comments, documents, records
and information related to the claim
Access by claimant (free of charge) to all documents, information
and records relevant to the claim
A review that takes into account all comments, documents and
information submitted by claimant regardless of whether submitted
with initial claim
41
Notice of Determination on Appeal Must Contain:
Specific reason for denial
Reference to plan provisions relied upon
Statement that claimant can receive for free access to documents:
(1) submitted, considered, generated, relied upon in connection with
decision; (2) that demonstrate compliance with procedures; or (3) for
group health and disability plans, any statement of policy or
guidance concerning the denied treatment
A description of any voluntary appeal procedures and statement of
right to bring a civil action
42
Transactions between an ERISA plan and a fiduciary or “party in
interest,” unless the transaction falls within specific statutory
exemptions or DOL-created exemption
43
ERISA fiduciaries and party in interest
o Person who provides services to the plan
o Any employer with employees covered by the plan (also
employee organization)
o Owners (direct or indirect) of 50% of voting power, capital
interest, profit interest, etc.
o “Relatives” of the above
o Employee, officer, director or 10% shareholder of above, etc.
o 10% owner of partnership
44
ERISA
o Individual liability for losses arising from prohibited transaction
o DOL-imposed penalties
o Injunctive relief
IRC
o 15% if corrected before IRS makes a tax assessment or mails
notice of deficiencies regarding it (first tier)
o 100% otherwise (second tier)
45
Prohibited transactions
o ERISA Section 406(a) states that:
• “A fiduciary with respect to a plan shall not cause a plan to
engage in a transaction, if he knows or should know that
such a transaction constitutes a direct or indirect:
– Furnishing goods, services, or facilities between the plan
and a party in interest
– Transfer of plan assets to a party in interest or use of
plan assets by or for the benefit of a party in interest
46
Fiduciary deals with plan assets for his own interest or account
The fiduciary receives any consideration for his own personal
account from any party in connection with a transaction involving
plan assets
47
Major exception – so long as reasonable compensation is paid,
contracting with a party in interest for office space, legal, accounting
or other services necessary to plan operation
48
Read your own plan documents
Keep documents and communications to participants consistent
Periodically self-audit operation of plan
Make sure you provide all legally required notices to participants
Timely notify participants of changes to the plan
Always check what boxes are “checked” in your adoption agreement
you receive from the plan provider
49
Timely correct any operational failures
Treat people and claims consistently
Operate the plan for the benefit of “all” participants
50
More important for retirement plans than welfare plans
The best practice approach to an uncertain future
Inform those who are fiduciaries
Train them on their role and related roles of others
Not time consuming or expensive
Places fiduciaries in good light for depositions and written discovery
responses
51
[email protected]
Thank you for your participation
in the UBA Employer Webinar Series
If your question was not answered during the webinar or
if you have a follow-up question, you can email the presenters today or
tomorrow at: [email protected]
www.UBAbenefits.com
www.jacksonlewis.com
To obtain a recording of this presentation, or to register for future
presentations, contact your local UBA Partner Firm.